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November 3 - The Gunfight At The O.K. Corral

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by: Mark J. Grant
Mark J. Grant
Chief Strategist, bonds, Special Situations, portfolio strategy
Summary

America is being presented with two very stark choices for the country's future and the markets, the closer we get to the election, may become very volatile and quite unruly.

In normal times, there would be a push out of equities and into bonds as the "safe haven" play.

However, we are not in normal times.

Politics always effects the markets. There has been no let-up in this for hundreds of years. Each and every day the markets are swayed by what the politicians are doing, and what they are likely to do. The participants in the markets stand back, look around, and then place their bets, and all of this is a normality for all of us, that play in the "Great Game."

In most elections, each party has been a little bit to the left, and a little bit to the right. There were differences, but not material differences. I submit that this is not the case in our forthcoming election. Take what side you like but the uncontestable reality, in my opinion, is that America is being presented with two very stark choices for the country's future and that the markets, the closer we get to the election, may become very volatile and quite unruly.

No one wants to talk much about this. Everyone prefers "same old, same old" but this is not the case in this election, and so it must be recognized. Moreover, the days leading up to the election could be filled with surprises. They could come from any debate, Nancy Pelosi's dream come true that there is no debate, or a myriad of accusations, surely coming, that could put the markets in a tailspin, once they rear their ugly heads.

In normal times, there would be a push out of equities and into bonds as the "safe haven" play. However, we are not in normal times. What we face is not "relative value" but "absolute value" with Treasuries, corporates and mortgage backed bonds yielding just this side of Zero. Day by day we are at historically low yields, or just off of them, and so the bond play has yielded its presence in our current markets to our current reality.

The easiest response then is to have additional cash. All fine and dandy except that cash, now, yields nothing, and so there is a cost for this maneuver and that is income. There was a time when you got a free toaster for opening up a new bank account, but those days are long gone and while cash still has a value, it is not what it used to be, in my estimation. Cash has been demoted and while it still provides some safety, mostly as a key to re-entry, the value of holding it is a costly experience.

In my view, a lot of bond money has become equity money as a matter of necessity. When there is no yield left, or almost none, money has gravitated to the "appreciation plays" as a matter of necessity for many people and institutions. This has worked so far, in many cases, but a good political surprise, or two, could send this strategy to the ground. The merry men at Robinhood, could soon learn a very serious lesson.

"Oh no, what goes up can also go down. Oh no, nobody told me."

Well, before we hit the skids, I am telling you. So, another answer, before a potential political shellacking, is income. Grab it where you may. There are dividend stocks, Exchange Traded Funds, closed-end funds, get some income and a cash flow because it may be needed. As a matter of this warning, I think that there is a high probability that it may be needed.

The civility in politics has turned into no civility and who knows what vicious tricks may be pulled, as our election day nears. I put nothing past the shenanigans of either party, and made-up news is likely to be the story of our days ahead as there will be less and less time to disprove anything. The accusation, itself, will become the source of the media's attention and the truth of it will be buried in political hijinks. A sad state of affairs for our country but there you are as "off with their heads" and "off their heads" converge in a very unpleasant manner.

With all of this going on, the Fed could also react. Their $7 trillion balance sheet could inflate to $10 trillion, or more, as they try to counter any rapid downdraft in the markets. As Treasuries approach a Zero yield, however, the one year Treasury Bill now yields 0.11%, the effect of lower yields has been minimized. Consequently, what worked before may not work so well in our immediate future, and this should be recognized. Yes, we could follow the European Union, Switzerland, and Japan into negative yields but then we will have a crisis of a different kind, which will including the banking industry.

Grant's Rules 1-10 still remain "Preservation of Capital." You worked hard to get where you are and now, in my opinion, our elections have increased the risk notably, seriously, and substantially, that our elections may play havoc with what you have attained. Whatever strategy you choose, preparation is the key, and as we close in on November 3, I suggest that you prepare for it.

"We ain't finished yet."

"You would have been, but I felt in a charitable mood tonight."

- The Gunfight at the O.K. Corral

Nope, we ain't finished yet, but we do know the gunfight is coming. There is no place to run and no place to hide for any American. Set your sights on November 3.

Gird for battle.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.